Malaysia’s FDI: Major factors and the way forward

Bastien Onn, Astro Awani

It is undeniable that our country is currently experiencing a major short fall in regard to Foreign Direct Investment (FDI). From being in the top tier of preferred ASEAN countries to invest in, Malaysia is now ranked behind the Philippines, Singapore, Indonesia and Vietnam, posting a drop of 68% in FDI for the year 2020 – 37% more than South East Asia’s average decline of 31%.

While this can be seen as an indication that our country is less preferred by foreign investors, there are factors to be examined alongside measures that can be taken to overcome this setback.

In what can be considered Malaysia’s fall from grace has prompted UMNO Youth Chief ,Dr Asyraf Wajdi Dusuki to demand an explanation from the Senior Minister for International Trade and Industry on how the Government plans to ensure that our Malaysia’s FDI will not slip further.

Major Factors Contributing to The Decline of Malaysia’s FDI

To understand the basis in the sharp decline in Malaysia’s FDI, a big-picture approach needs to be applied while taking into consideration all possible factors. To do this we need to go back to major events that occured in recent years.

This fiasco began post #GE14 due to the decisions made by Barisan Nasional’s successor that shook the confidence of foreign investors. From sudden cancellation of multi-billion Ringgit projects undertaken by foreign partners to the halting of key infrastructure development projects – there was no way our country could avoid being sidelined by foreign investors.

The failure of Pakatan Harapan’s government to maintain the upstanding policies and diplomatic relations fostered by its predecessors, their willingness to break promises given via contracts signed prior to their term, the improper strategies that deteriorated previously-healthy relationships with key foreign investors are all underlying factors which contributed to Malaysia’s poor performance in 2020.

It is clear that the significant drop in Malaysia’s FDI is a culmination of ill fated, prolonged backtracking and inconsistent decision making by the then Federal Government.

There are other factors we need to understand. While China remains the biggest investor in all South East Asian countries, Malaysia’s over reliance on China’s investment in the past years is crucial factor that contributed to the decline in last year’s FDI. The flow of foreign investment took a plunge when China’s investment stopped after most major contracts Malaysia signed with China were either cancelled, halted or revised unilaterally.

Not to mention, the added accusations of corruption involving Chinese conglomerates and Malaysia’s prominent leaders, which has made things worse.

The COVID-19 pandemic has further shifted investor preferences when it comes to deciding which country they want to invest In, and the size of a country’s population is one of example. Indonesia’s population of almost 300 million is one Malaysia will never have – this has made Indonesia a preferred destination for multinational corporations such as Tesla, who was recently rumoured to have chosen to create an Electric Vehicle (EV) battery supply chain for its fleet of vehicles in Indonesia.

The market size of Indonesia fits well with Tesla’s outlook, include the added advantage of manpower surplus that Indonesia has. Indonesia’s position as the world’s biggest nickle producer has given its government the upper hand in luring Tesla publicly. Nickle is a crucial substance in producing EV batteries and the Indonesian government has changed its policies to stop the export of nickle despite being one of the world’s top exporter.

The Indonesian government’s vision of seeing EVs roaming its cities by 2030 has led to the establishment of a full nickle supply chain – from extraction, processing into metals and chemicals to be used in the EV battery production.

The spill-over effect of Malaysia’s strong economic growth in 2015 to 2017 which was felt throughout 2018 and 2019 constitute part of the factor affecting the Malaysia’s FDI. Confidence in the growth of our economy in the past years has contributed to healthy inflow of foreign investment in both years. It is unfortunate that during the 22 months of Pakatan Harapan’s rule, time was wasted on never ending politically driven witch-hunts, instead of policies that could have propelled Malaysia’s economy further.

The constant propagation of untruthful facts, for example the ballooning of national debts to the trillions, which was cleverly crafted via an unconventional accounting method, has created negative sentiments that affected Malaysia reputation to this day.

Such are the result of entrusting an unqualified accountant to the helm of Ministry of Finance. In its effort to appear as a champion in good governance, the Pakatan Harapan government failed to realise the after effect of the continuous spread of fake news especially those relating to the economy and financial management of the country. All of the wrong moves has weaken Malaysia’s economy. As what happened in the 22 months of Pakatan Harapan’s rule, it just doesn’t make sense how we could’ve gain investor’s confidence when the narrative by the then Finance Minister was constantly highlighting our dire state of debt that has surged past RM1 trillion. Such ill intended narratives clearly does not strengthen our economy thus resulting to its bad effect to be felt through 2020.

The Way Forward

There is a lot to be learned from neighbouring countries when it comes to FDI. Strategic policies implemented by Indonesia and Singapore in the last few decades have resulted in both countries to become the preferred destination for foreign investors to invest in. Take Indonesia as an example where its government have a clear vision in creating an investor friendly environment.

Besides introducing a fully electronic Online Single Submission System (OSS) which can expedite, synchronize and integrates business licensing application across various ministries, the Indonesian government has released sixteen Economic Reforms Packages in the past four years alone. That is how aggressive the Indonesian government is in ensuring continuous flow of investment to aid the development of its economy.

The current Malaysian Government needs to ramp up its effort to shore up foreign investment for 2021. It can start by creating positive sentiments towards attracting additional FDI to help counteract the economic downturn. The period of Emergency should be utilized to the government advantage by releasing more Economic Reform Packages and introducing more effective policies in spurring the economy. The Government needs to be bold to ensure that Malaysia is not being left behind while the world economy is recovering from the impact of the pandemic.

The introduction of the RM35 billion Pelan Jana Semula Ekonomi Negara (PENJANA) as announced by Prime Minister, Tan Sri Muhyiddin Yassin came at the right time. The 40 or so short-term economic recovery measures which are aimed at increasing FDI or will have an impact on FDI in Malaysia encompasses measures that will stimulate both foreign and domestic business investment. Some bold steps needs to be taken to enhance the measures under PENJANA.

One improvement that can be made is in relation to PENJANA’s 34th initiative, aimed to make Malaysia an attractive horizon for businesses. In attracting foreign companies to relocate their business into Malaysia, the Government allocation of RM50 million for this initiative needs to be increased to an amount that is significant and attractive enough to foreign businesses.

The advantageous tax rates combined with allowances offered must be at a rate that is competitive with our neighboring countries while the length for the special tax rate offered should be extended for at least another three to five years. Since there are many factors involved if a foreign company were to relocate their business into Malaysia such as the risk of relocating, long term benefits should be offered to really make Malaysia attractive.

Concentrated efforts and undivided commitment by various government agencies and ministries such as the Malaysian Investment Development Authority (MIDA) under the Ministry of International Trade and Industry (MITI) are needed to facilitate the relocation of foreign companies to Malaysia. The same goes to facilitating the inflow of investment in high value, high tech and high impact sectors.

The acceleration of processing time for manufacturing licence applications together with other related license application are crucial and this must match the expedited process offered by countries like Singapore and Indonesia. This can easily be done via the creation of an integrated online platform across all ministries to create a seamless expedited process for related applications from application for licensing up to application for tax breaks and incentives.

On top of that , the government needs to craft a well-structured and an all-out outreach campaign to raise awareness on all of the benefits of investing in Malaysia. It is high time to fully utilize all offices of Malaysian missions abroad to assist in disseminating the good offerings to targeted multinational corporations in each foreign countries they are operating in.

Creation of a laser-focused program targeted to corporations from the world’s economic power houses, according to the identified sectors are to be distributed accordingly to each respective Malaysian mission abroad. Not to forget the establishment of an online presence to conduct media campaign across all media platforms.

More efforts are needed to encourage co-operation and commercial partnership between local and foreign companies in line with the increasing global and domestic demand, while providing direct support measures such as tax breaks for hard-hit sectors such as hospitality, transportation and construction, will definitely bring fruitful result not just to the economy but also to ensure Malaysia’s 2021 FDI returns to the highest within South East Asia.

All of the measures suggested above need to be drastically implemented not just to enable Malaysia to attract more foreign investment but also to retain the existing investment to avoid those businesses from shifting out of Malaysia.

The last measure needs to be in place is by strategically widening up the option of Malaysia’s foreign investor. During this pandemic era, multi-national corporations from all over the world are searching for alternative investment destinations for them to invest in. While this presents an opportunity, Malaysian Government must avoid from depending on a single nation to be its biggest investment partner.

Over reliance on China as how Malaysia did in the past is a mistake that should never be repeated again. This could be avoided by leveraging on Malaysia’s strong bilateral relations with the United States, leading European countries as well as the 2nd biggest growing economy, India.

It is not all doom and gloom for Malaysia, as how the opposition in Pakatan Harapan are claiming. IMF forecasted Malaysia’s GDP for 2021 at 7%, the third highest right behind China and India while Moody’s Investor Service has affirmed Malaysia’s A3 rating with a stable outlook. The forecast by the former and rating by the latter translates into foreign expert’s confidence in Malaysian economy.

By stepping up the effort in boosting our economy through bold and drastic measures, the current government will definitely achieve success not just in building a stronger economy that will be beneficial to all Malaysian but also denying the never ending fake news propagated by the irresponsible self-serving political leaders who has never stop in their effort to tarnish the image of our beloved country.

I urged all Malaysian across all political divide especially the business communities to strive together to build a resilient economy in going through this testing time of our generation.

Bastien Onn is a Malaysian politician. He is also currently the UMNO Youth Exco